The pain is just starting for commercial real estate – and plunging prices could reignite the banking crisis and choke the US economy, Columbia professor says

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  • A Columbia professor has issued a bleak outlook for commercial real estate in the US.
  • Office values are plunging and threaten to cause an “urban doom loop,” Stijn Van Nieuwerburgh said.
  • The sector’s challenges could spill into the banking sector and hurt the wider economy, he said.

The pain is just beginning for commercial real estate (CRE), and the fallout could hit the banking sector and wider US economy, a leading academic has warned.

Stijn Van Nieuwerburgh, a real estate and finance professor at Columbia Business School, sounded the alarm on an “urban doom loop” for CRE in a recent RealVision interview.

He explained that soaring interest rates and the shift to remote working have slashed the value of office space in cities. He expects that to translate into lower property-tax revenues, and the budget shortfall to force urban authorities to raise taxes or spend less on education, transportation, sanitation, and other public services. If cities become more expensive and less appealing, people are likely to move out, cutting real estate values even more and causing a downward spiral, he said.

“We are in the early phases of this doom loop,” Van Nieuwerburgh said, noting his calculations suggest that property values have further to fall.

The professor pointed to data indicating that office usage, lease revenues, and the number of new leases being signed remain well below pre-pandemic levels. Vacancy rates have also surged to their highest level in about four decades, he noted.

“We haven’t seen a crash like this since at least the early 1980s,” he said, adding that lower-quality offices could drop in value by as much as 45% over time, and the overall office sector is set to suffer a $500 billion decline in value.

Van Nieuwerburgh emphasized that many Americans are exposed to that slump. Pension funds, real estate investment trusts (REITS), and other entities have invested significant sums in CRE, and the office segment specifically.

He also underscored that regional banks are key sources of financing for CRE, meaning they could run into the same kinds of problems that toppled Silicon Valley Bank and Signature Bank earlier this year.

“I do worry that there is potential for a spillover here, that we haven’t seen the end of the banking crisis yet,” Van Nieuwerburgh said. He cautioned that if smaller banks suffer losses in their CRE portfolios, they might pull back on lending to small businesses, which could crimp economic growth.

“The worst case scenario is a pretty bad event,” he said. “The most likely scenario is one of slow burn, the train wreck in slow motion, where banks will have to provision for several years, or will have to take losses for several years.”

“It’s not going to be supportive for the economy, we will have a modest credit crunch,” he added. “That’s the best-case scenario.”

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